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International Banking and Financial Regulation Alert

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13 SEP 2016

The European Commission has adopted a proposal to strengthen anti-money laundering (AML) and counterterrorism financing (CFT) measures related to virtual currencies.

The proposal, adopted in July 2016, seeks to bring greater transparency to the virtual currency market in the European Union by imposing customer due diligence (CDD) requirements on certain market participants, now considered “obligated entities” under the EU’s Fourth Anti-Money Laundering Directive (4AMLD), which will come into effect on June 26, 2017.

The response brings the EU into greater alignment with the US regulatory scheme, under which certain virtual currency participants are considered “money transmitters” subject to AML/CFT rules promulgated by the Financial Crimes Enforcement Network.

Virtual currencies are digital representations of value neither issued by a central bank or public authority, nor derived from a fiat currency. Rather, their value derives from their common acceptance among a group of natural or legal persons as a means of payment that can be transferred, stored, or traded electronically. The usage of virtual currencies continues to grow – as do concerns about the true identity, and intentions, of their users. But despite these issues, virtual currency intermediaries (e.g., platforms, providers, exchanges) were not originally included in the 4AMLD’s definition of obligated entities. Moreover, no other EU regulation requires the monitoring of virtual currency transfers for money laundering or terrorist financing risk.

To allow competent authorities to monitor suspicious virtual currencies transactions, the proposal will subject “all gatekeepers that control access to virtual currencies, in particular exchange platforms and wallet providers" to the 4AMLD’s requirements for obligated entities. These requirements include, among others, implementing preventive AML/CFT measures, conducting CDD on customers and beneficial owners, assessing their associated money laundering and terrorist financing risks, and reporting suspicious transactions involving virtual currencies. As a result, virtual currency intermediaries who will be classified as obligated entities under the 4AMLD must ensure that they establish a satisfactory compliance program before the Directive comes into effect or they run the risk of facing potentially severe sanctions.

The proposal seeks to reduce the higher degree of anonymity associated with virtual currency transactions as compared to more traditional transactions. The proposal argues that the credibility of virtual currencies will not rise so long as they are associated with criminal enterprises (i.e., Bitcoin and Mt. Gox, Silk Road). Subjecting certain market participants to the AML/CFT framework, the proposal affirms, will give customer end-users stronger confidence in virtual currencies. And, while this will decrease anonymity among virtual currency transactions involving intermediaries, the proposal also urges national financial intelligence units to combat anonymity in transactions not involving these entities by associating virtual currency addresses with the true owners of the virtual currencies.

Learn more about how the 4AMLD proposal and other financial services regulation will impact virtual currency transactions by contacting any of the authors.